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What is Customer Segmentation? Full Guide

Discover what customer segmentation is, its strategies, types, customer segmentation examples and how it boosts business growth and targeted marketing.

  • Overview
  • What Is Customer Segmentation?
  • Why Segment Customers
  • Types of Customer Segmentation
  • How To Develop an Effective Customer Segmentation Strategy
  • How To Collect Data for Customer Segmentation
  • Customer Segmentation FAQs
  • Customers using Snowflake Data Clean Rooms
  • Customer Segmentation Resources

Overview

Customer segmentation is key for effective modern marketing strategies, designed to help organizations better target their marketing efforts by understanding patterns of customer behavior better. Customer segmentation allows a business to more easily personalize its marketing efforts without having to create a separate marketing plan for each customer individually. This can ultimately lead to a better experience for everyone, all while improving the overall ROI of the business.

What is Customer Segmentation?

As the name implies, customer segmentation is a process of grouping a business’s customers or clients into natural collections, based on key characteristics that are meaningful to the business. The goal of customer segmentation is to improve your understanding of what groups of customers care about, how they behave and what they have in common.

In many organizations (especially business-to-business operations, or “B2B”), these customer segments are known as personas. A persona defines a single prototypical customer in detail, one who would be a typical member of the segment. This persona, which may even get its own name, like Sheila or Joe, might include a job title, age, years of experience, work responsibilities, motivations, business challenges and key skills. Marketing teams tailor bespoke messages to each persona. 

Whether B2B or B2C (business to consumer), all customer segmentation efforts are used to help marketers make decisions about where to invest marketing dollars and how best to reach those segmented customers.

For example, an auto dealership might segment its customers (and potential customers) based on gender, age, income and family size, recognizing that a 45-year-old parent of three probably has different vehicle needs than a 21-year-old college student. The specific characteristics of each of those groups will help the dealership figure out where to advertise, what types of ads to run and what types of vehicles to promote.

Regardless of the type of business, customer segmentation has become a powerful component of modern, data-driven marketing efforts.

Why Segment Customers

Customer segmentation offers businesses advantages in marketing over more blunt, untargeted methods, improving personalization (and thus customer satisfaction), increasing conversion rates, boosting customer loyalty and maximizing marketing ROI. Specifically, customer segmentation can help you in a number of key ways:
 

  • Customer segmentation lets you fine-tune your marketing messages by letting you communicate with each segment in the way they prefer and which has the greatest impact. For example, younger customers may gravitate to funny TikTok clips, while older customers may prefer factually driven print or direct mail.

  • Segmentation saves on your marketing spend, since a smaller pool of recipients can receive targeted messages rather than through a broad “shotgun” approach.

  • Customer segmentation often opens up communications to allow for better feedback from customers, as these customers may feel more valued and that their opinion is being taken seriously. This kind of feedback can improve the way you design or update new products and services.

  • Test markets are easier to develop with a smaller, segmented customer base. If a product is successful with one segment, it can be rolled out to additional ones. Similarly, targeted upselling opportunities are often easier to close within a segmented group than when delivered en masse.

  • Customer segmentation enables maximizing the ROI of the business by allowing you to target each customer group with the most profitable products, based on their wants and needs.
     

Ultimately, customer segmentation is all about getting to know your customers and their needs better. Conversely, failure to segment your customer base, or segmenting customers poorly, is a recipe for wasted resources and missed opportunities.

Types of Customer Segmentation

Customer segments can be created by using innumerable variables and characteristics, but most organizations will find some of the most popular types of customer segmentation models to be the most helpful. Those include:
 

Demographic segmentation

One of the most foundational types of customer segments involves simple demographics, especially in consumer-facing businesses. Depending on the type of product or service being sold, segments can be built based on age, gender, race/ethnicity, religions, marital/family status, income level and similar data that defines who a person is.
 

Geographic segmentation

It’s very common and often quite beneficial to segment customers based on where they live, work or frequently travel. For retail stores that rely on foot traffic, geographic segmentation is often crucial, as marketing efforts have the greatest impact on customers who live within a certain radius of the physical location. Online sellers can also find great value in segmenting customers and prospects based on city, county, state or country of residence.
 

Psychographic segmentation

Psychographics are related to demographics, though they dig into the values, interests and lifestyle of the customer — things the customer thinks rather than who they are. Political beliefs are also a strong and commonly used psychographic detail. This information can be more difficult to come by naturally and tend to be generated via focus groups, surveys and online activity analysis through things like social media “likes” and cookie tracking.
 

Behavioral segmentation

Here we move beyond who a customer is and what they think and into how they actually behave. How likely is a customer to abandon a shopping cart? How likely are they to return a product they’ve purchased? How far will they travel to get a discount? How do they use your product, and which features do they enjoy the most? Digging into these behavioral details can provide immense amounts of information that direct future product development and marketing tactics.

How To Develop an Effective Customer Segmentation Strategy


Ready to start segmenting customers? Here are the main steps to get you on the road to a successful segmentation plan.
 

1. Collect relevant data

To understand customers well enough to segment them, you first need data about them. There’s no one way to collect customer data, however, and the process depends on the type of data you’re collecting. Some data can be inferred or estimated on the fly — such as age and gender — while more personal details such as income or education level require either surveying the customer directly or relying on third-party databases that have collected this information through other means. So-called social listening techniques, wherein online conversations are monitored and analyzed, can be used to identify customers’ opinions and sentiments about public issues and/or your products. Business reviews on sites like Yelp can be a gold mine for this type of information. We’ll talk more about data collection in a later section.
 

2. Identify meaningful segments

Armed with customer data, how do you segment it? Chances are you’ll want a variety of segments for various purposes, but remember that a customer may fit into multiple segments. You might use a demographics-driven segment of only men, college-educated and 40 years old or more to develop a particular ad campaign in a men’s magazine. Another segment drawn from psychographic analysis may search for customers who have complained publicly about your business at any time in an online forum. These customers may be targeted to be invited to join a focus group about how to improve your products.
 

3. Tailor marketing messages

One of the most common uses for customer segments is to create personalized marketing experiences designed specifically for each customer group. Marketers can take the entirety of the information they have about each segment and use that data to build marketing programs that resonate directly with the group. Then, the segment can receive the resulting personalized interactions and experiences via the chosen media channel.
 

4. Test and refine segments over time

Personalized interactions aren’t valuable on their own. You must track them for effectiveness and impact, especially to determine if the personalized messaging has better results than your standard marketing messages. Tracking results immediately after sending each message allows the business to continually refine both the segment and the messaging. Marketing analytics tools can be invaluable at helping to track the performance of each campaign and to deliver useful insights into customer attitudes and behaviors.

How To Collect Data for Customer Segmentation

Customer data doesn’t just grow on trees. It has to be collected in a meaningful, intentional way. Collecting customer data can be challenging. Not only do various laws and restrictions govern the collection and storage of customer data, these rules are constantly changing and growing more complex — and they vary from one region to another.

Here are some sources teams may use to safely mine quality customer data.
 

CRM systems

Your first stop for customer data should be your existing CRM system, which is likely full of information your customers have voluntarily given you over the years, whether you realize it or not. Obviously, B2B companies with a one-on-one sales force will have more meaningful and in-depth data in their CRM databases than, say, a retail bookstore, but companies of all types are likely to have some type of customer records that they can use as a starting point for building their customer segments.


Transactional data

Every time someone buys a product from you, that’s a data point that you can use for your customer segmentation efforts. Transactional data can include the time and location of a purchase, the amount of the transaction, the specific product mix bought, how the customer paid for the purchase and whether that purchase was associated with any returns. All of this information can be useful in fine-tuning a customer segment.
 

Website analytics

Configured properly, your website captures loads of information about customers who visit you digitally. This type of data includes their location, browsing platform (for example, desktop or mobile), the length of time they spend on your site, which pages they visited and whether their visits convert to a sale. This data can be instructive at fine-tuning your site, or even serving different versions of your site to different types of visitors.
 

Social media insights

Customers gladly provide their thoughts and opinions on a variety of social media channels. You can mine these comments using social media analytics tools to develop segments of customers who have various attitudes toward your business. Then you can take that data to develop marketing campaigns that target customers with positive, negative or neutral sentiments.
 

Customer surveys and feedback forms

Naturally, asking customers directly about their demographics and psychographics is a key method for understanding them and building your customer segments. How this information changes over time can also be a valuable part of your segmentation strategy.
 

Third-party data providers

If you can’t collect customer information directly, you can take steps to purchase it from third parties. Note however that this type of data is subject to more restrictions than data you collect yourself due to a bevy of privacy rules. This data may also be partially anonymized, giving you less clarity and detail than first-party data can provide.

Customer Segmentation FAQs

Here are some additional questions commonly asked about customer segmentation.
 

What are the differences between customer segmentation strategies and market segmentation?

While closely related, customer and market segmentation are separate disciplines. Customer segmentation is designed to place individuals — actual customers — into logical groups, while market segmentation looks broadly at all the potential customers of the business. Market segmentation then breaks down this broad market into subgroups that companies can use to help understand its characteristics at a high level. Put simply, market segmentation helps to identify potential customers, while customer segmentation helps better reach existing ones.
 

What is a customer segmentation example?

One simple example is a jewelry store. The store may segment its customers by gender, with the premise that men are likely to be shopping at the store for gifts for their significant others but women are likely to be shopping for items for themselves. The store may use this to promote an expensive anniversary ring to the segment comprised of men while targeting the segment of women with offers for more casual jewelry.
 

How do you identify key customer segments?

While customers can be segmented in any number of ways, determining which of those segments are meaningful is the bigger challenge. Identifying meaningful customer segments requires some level of trial and error. Once businesses create segments, they must create marketing strategies designed to resonate with each of them. After running the campaign, the business should gather metrics (such as response rate and sales) and compare them against a baseline. If the segment shows radically different results, it’s more likely to be a meaningful segment. Over time, a fuller picture of the most meaningful segments for the business, those with those most impactful metrics, will emerge.